The next emerging market: Philippines as a New Asian Tiger

By J. Zhang

The four current emerging markets giants, BRIC (Brazil, Russia, India, and China) have earned their distinction, each demonstrating tremendous growth over the last few decades. Though their GDP continues to grow, their stock market gains over the last three and a half years since the financial crisis bottom have either been comparable to or significantly trailing the S&P 500.

Since March 2009, the Brazil stock market has increased 60%, Russia 145%, India 120%, and China a stunning negative 8% while the S&P 500 returned 115% in the same time frame. For China, this performance occurred as it grew from a $5 trillion dollar economy to an estimated $7.5 trillion today while U.S. GDP stagnated.

While most agree emerging markets and Asia is where future growth will occur, the historical BRIC standbys are no longer the easy answer. Year to date, Brazil has returned -2.7%, Russia 11.4%, India 20%, and China -0.2% with the S&P at 16.25%. It can be argued that these traditional BRIC countries are no longer “emerging” and are now mature economies.

To truly profit from emerging economy opportunities, we’ll have to look at the next tier, after the first Four Asian Tigers and after the BRICs. The possible candidates include Indonesia, Thailand, and Malaysia; however the one that stands out the most is the Philippines. In contrast to the returns mentioned above, the Philippines beat all of them with a 28% YTD return and an overall return of 191% since the financial crisis bottom.

Here are both the positives and the negatives for the Philippines:

Positives:

Size – Philippines is the 7th most populated Asia country and 12th most populated country in the world at over 100 million people and a GDP of ~$215 billion USD. Much like China and India, the large population offers up potential in the long term for a large and sustainable demand based economy.

Demographics – Philippines has a very favorable demographic as many are young and in prime working age. Over 61% of the population is 15-64 yrs old, 35% are 0-14 yrs and the median age is only 22. In contrast to aging countries, this is a large growing population ready to enter the workforce and fill its factories. Economic studies list young worker population as one of the largest predictors of future economic growth. For example, China grew on the backs of its large labor force to its factories.

Agricultural shift – Unlike the BRIC countries, Philippines today is still at the early stages of a shift from an agricultural economy to an industrial economy. Historically this once in a generation shift tends to lead the way for modernization of the economy and a subsequent boom and growth as factories and businesses grow – again, see China.

Economic momentum – Overall, the Philippines has strong economic momentum on its side. Its stock market is one of the best performing in the world YTD, beating the emerging market 28% to 11.7%. It has good GDP growth with a 1st quarter showing 6.4% growth. It has a growing export sector, growing 8% to $26.75 billion for the 1st half of 2012. Unlike the BRICS, this growth is occurring at very low inflation of just 3%.

English language – As a former American colony, the Philippines is an English speaking country. This significantly eases integration into the world economy. It has also allowed a growing service and call center industry to take root.

Negatives:

Poor government policy – Perhaps a theme across the world, one of Philippines biggest issues is potential poor economic stewardship. Proper policies that promote growth are especially important at this early stage. Though the current government is relatively stable, corruption is a problem. As an example, be prepared to bribe airport employees to find out where the bathrooms are.

Global macro outlook – Much like other countries, the slowing global outlook will affect the Philippines. In the last couple of quarters, signs of slowing demand and exports indicate the Philippines is not isolated from the world.

Poor infrastructure and people productivity – To grow in the long term, Philippines needs significant improvements to its infrastructure and a stronger focus on education as there remains significant socio-cultural issues and a large poverty rate. Unemployment currently stands at 6.9% though underemployment remains high at 19.3%. However, this is common for emerging economies at this early stage.

Early developing economies are more difficult to invest in than the typical stock due to their underexposure. The best option is the iShares MSCI Philippines ETF
/quotes/zigman/1554532/quotes/nls/epheEPHE which focuses on the Philippines stock market. The emerging market ETFs (EEM, VWO) both have some exposure and other options can be found at ETFdb.

For those who missed the early stage of the BRIC growth, the Philippines represent the opportunity to get in on the ground floor for the next wave.

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